Lawmakers Debate Competing Needs for Housing, School Funding

Legislative attempts to create a program to boost home construction have touched off a Statehouse battle over whether the proposal would bleed money from public schools. The proposal is fraught because lawmakers and the governor are already engaged in a high-stakes debate over education reform that focuses in part on holding down school property tax increases.

The Community and Housing Infrastructure Program, or CHIP, proposes to let housing developers benefit from a tool that cities and towns have long used to fight blight. It’s called tax increment financing, or TIF. Since 1996, municipalities in Vermont have used TIF districts to revitalize underutilized areas. It’s how Burlington spruced up its waterfront, Winooski built lots of new housing and St. Albans revitalized its downtown.

While TIF districts can be effective redevelopment tools, they’re complex, tricky to administer and rarely used by small towns. Only nine of Vermont’s 247 cities and towns have active TIF districts. A municipality must first designate an area it wants to fix up, then sell bonds to pay for the upgrades. The resulting increased property tax revenues are then used to pay off the bonds over time.

For the first time, private developers would be allowed to use a new TIF tool: a “mini-TIF” or “project-based TIF” that would allow the developer to borrow money to clean up contaminated soil, lay water and sewer lines, and build new streets and sidewalks before building a housing project.

The loan would be paid back, in part, by the increased taxes resulting from the new homes. Such TIFs could also be used by cities and towns to install utilities to make an area more attractive to housing developers.

“This is a brand-new program that is a potential liability on the statewide education fund and the statewide education property tax.” Rep. Charlie Kimbell

Opponents of the CHIP proposal worry that these TIF projects would siphon off property taxes intended for the state education fund, which, in turn, aids school districts. Lawmakers, lobbyists and Gov. Phil Scott have been tussling for months over how to structure a program that lets TIF boost home construction without diverting education dollars.

Scott sees the program as a powerful tool to encourage the construction of up to 7,000 new homes in the next five years. He wants it to be big, bold, and something that can be used by developers large and small across the state instead of a modest program that, in his words, just “nibbles around the edges.”

“If housing is truly the priority we say it is, we need to follow through and make sure that all communities have the tools that they need to grow,” he said last week.

But lawmakers caution that the financing tool at the heart of the new program needs to be used sparingly. Some worry that if tapped as widely and broadly as the administration hopes, CHIP could further imperil the state education fund at a precarious time.

“This is a brand-new program that is a potential liability on the statewide education fund and the statewide education property tax,” Rep. Charlie Kimbell (D-Woodstock) told colleagues.

Kimbell reminded lawmakers that the education fund needed a $77 million lifeline in the 2025-26 budget so that property taxes wouldn’t increase sharply again. That cash infusion will keep average property tax increases for schools to around 1 percent, compared to the jarring 14 percent surge in 2024-25.

The prospect of another ed fund bailout next year and deep uncertainty about future federal funding for education make it wise for lawmakers to proceed with caution, he said. Kimbell serves on the tax-writing House Ways and Means committee, which inserted “guardrails” meant to keep CHIP from getting out of hand.

These originally included a cap on the amount of taxes that could be returned to developers to pay for the infrastructure; limits on where such housing could be located; and binding agreements, or covenants, from developers that the resulting housing units would be affordable and used as primary residences.

Lawmakers say they are merely trying to ensure that taxpayer funds would be well spent. For example, they want TIF districts to be created only for projects that truly need them. The goal is to leverage the funds to spur housing that otherwise wouldn’t pencil out.

One of those projects, according to Russ Scully, who founded the coworking space Hula on the Burlington waterfront, is the huge housing development that he and his partners want to build in the city’s South End. They’d like to construct up to 1,400 units on what is now a mostly empty parking lot on Lakeside Avenue.

But Scully told lawmakers recently that the project is at a “standstill.” The tight labor market, the impact of tariffs on construction materials and high interest rates are all weighing on the project’s viability.

“We’re currently unable to move forward unless we get some sort of help with infrastructure costs,” he told lawmakers.

It would be a shame if the project didn’t get built, Sen. Kesha Ram Hinsdale (D-Chittenden-Southeast) said. If someone with Scully’s resources and entrepreneurial spirit can’t pull off a housing project in a city that needs it so desperately, then Vermont will never claw its way out of its housing crisis, she said — meaning government should do its part.

“This is likely to be the biggest housing project of the decade,” she said.

It’s not just developers behind big projects that could use the funding mechanism. A community housing project in flood-ravaged Plainfield is investigating whether it could use the proposed new TIF tool to help buy land and install utilities. (See “Home Hacks,” page 26.)

The concept of expanded TIF funding has been floated before but never went anywhere. The idea gained traction this session in part because the housing crisis persists despite hundreds of millions of dollars of public subsidies. Vermont is building fewer than a third of the homes it needs to meet demand. The inability of workers to find housing is causing about $700 million in lost economic output every year, according to Alex Farrell, commissioner of the state Department of Housing and Community Development.

The administration’s streamlined version of the program enjoyed strong support from the Senate and some House committees, Farrell said. But when the bill got to House Ways and Means, it took a “dramatic turn” that was “very unproductive,” Farrell said.

Committee chair Emilie Kornheiser (D-Brattleboro) immediately characterized the program as a “significant risk to the education fund.” If lots of builders across the state get their infrastructure paid for with property taxes, significant tax dollars will be diverted from education, she argued.

“I don’t see any reason why any new development that’s being planned anywhere in the state wouldn’t want to take the opportunity to join [CHIP],” she said.

When property is taxed, roughly 25 percent goes to the municipality and 75 percent to the state education fund. When properties are developed, their value — and the assessed taxes — increase. Under CHIP, all of the increase, or increment, in taxes could be used to pay for the infrastructure upgrades.

If developers use a TIF district to finance a project’s infrastructure, 60 percent of the higher taxes that would normally go to the state education fund could be returned to them. That figure could rise to 80 percent for projects that include enough units for low- to moderate-income residents, currently pegged at 20 percent.

Some legislators are asking why the state should send tax revenue meant for schools to developers who, they worry, would likely pursue their projects even without the funding.

Scott called that a “hollow argument” and one he’s heard for decades.

“I just don’t buy it,” he said last week. “I just don’t believe fundamentally that these projects would be built without TIF.”

The notion that the financing tool would “rob” the ed fund makes no sense if the project wouldn’t get built otherwise, Scott argued. If projects weren’t built, people who needed homes wouldn’t get them and revenues destined for schools wouldn’t grow, he said.

Bogging down the program with too many restrictions will only hamper its effectiveness, he argued.

House lawmakers first proposed a cap on total tax reimbursements of $40 million for each year of the pilot program, or up to $240 million. In a compromise meant to help avoid a veto, they gave Scott the right to request an additional $5 million per year if needed. Before passing its version of the bill last week, the House also voted to strip out an anti-sprawl provision that required CHIP projects to be within half a mile of an “existing settlement.”

One outstanding thorny issue: whether municipalities would need to police the primary residency requirements. Municipal managers say that’s not their job.

The legislature’s nonpartisan Joint Fiscal Office said it couldn’t estimate how much the program would cost the education fund because it’s unclear how much it would be used.

The House and the Senate are due to hash out their differences in a six-member conference committee this week.

It’s unclear whether lawmakers can pass a bill that Scott would sign. Last week, the governor expressed exasperation that lawmakers were playing it safe when the moment calls for bold action.

“We all ran on this,” Scott said, referring to the need to address the housing shortage. “But we’re not willing to go out on a limb just a bit to help ourselves out of the crisis we face?”

The original print version of this article was headlined “Taxing Dilemma | A bill meant to fund housing infrastructure collides with the need to protect school funding”